“Hell Week.”

That was the bad news borne by Bear.

“Scramble to calm markets,” is today’s frontpage headline on the Financial Times . Yesterday, the Dow went up...the Dow went down...and the Dow ended almost where it started the day.

Gold went down $3. Oil fell $4.53. And commodities got hit hard; the CRB fell 23 points.

And the dollar took another beating too. It sank to a 12-year low against the yen. Against the euro, it dropped to $1.56.

“We have entered a new, scarier, uglier phase of the crisis,” said Marco Annunciata of UniCredit.

A major failure on Wall Street usually means the end of a market downturn, says John Authers in the FT : Continental Illinois in ’64, Drexel Burnham Lambert in ’90, Kidder Peabody in ’94 and Longterm Capital Management in ’98.

But was Bear the end of the problem...or just the beginning?

“Wall Street waits for the next domino to fall,” says an FT headline from yesterday.

In the aftermath of the Bear saga, investors started asking questions about Lehmann Bros. The firm had to publicly announce that it was solid. Of course, Bear said it was solid too. And as Walter Bagehot remarked in 1873, “every banker knows that if he has to prove he is worthy of credit...in fact, his credit is gone.”

Soon, other Wall Street institutions are going to begin announcing their latest results. The tide has gone out; we’re going to see who’s been swimming naked, says Buffett. One thing we’re going to see is huge leveraged loan portfolios written down. Goldman Sachs and Morgan Stanley are expected to write off about $1 billion. Deutschebank says the writedowns will be about $9 billion over the next 6 months. DB itself has more than $50 billion of leveraged loans (to private equity) on its books. Goldman has nearly $40.

But not to worry, U.S. Treasury Secretary Henry Paulson says, “our financial institutions are strong” and that he will do “whatever is necessary” to keep the system working properly. The president of the all the Americans, George W. Bush, too, has said that while the times are “challenging,” he and his team are “on top of the situation,” which is what we were worried about. Meanwhile, the papers say that Ben Bernanke is being pressured to cut rates...and the bookies are giving long odds that he won’t.

We will worry anyway, thank you. Because we doubt that the science of central banking as practiced by Bernanke, King and Trichet is really any more reliable than the science of modern portfolio management as practiced by the geniuses at Bear, Lehmann and all the others. (More on that later in the week...)

But let us step back and look again at the big picture.

We take as a given that central planners are as prone to error as a bear to honey. It also seems likely to us that it was a mistake for Alan Greenspan to cut rates so aggressively in ’02-’03 and leave them below the inflation rate for so long. The result was an orgy of spending and borrowing in the Anglo-Saxon economies...and an orgy of factory-building and capital formation in Asia. In both parts of the world, people missed their marks – overdoing it considerably.

And now there is Hell to pay.

As to how the bill will be settled, we are uncertain. There are two schools of thought.

On one hand are the deflationists, who see an economic meltdown, with lower prices...and a flight into U.S. Treasury bonds (and the dollar) for safety.

Below...we present a lively exchange between the two schools of thought. But here at The Daily Reckoning , we never liked schools. We played hooky at every opportunity...and learned what we could by keeping our eyes open. In fact, now we see a different world than either the inflationists or the deflationists...a world both rising prices...and falling prices...where inflation and deflation alternately bicker and make up...like a married couple.

We have described this tension as a “war” between the two forces – one, unstoppable...the other, irresistible. But the two are as likely to be friends as enemies. They may squabble and even come to blows...but they still sit down to tea with each other at 4PM. They can’t live with each other...and can’t live without each other.

Yesterday, for example, we saw them both walking along, holding hands. Stocks rose in the United States. But so did gold. And when they visited the treasury market, bond prices rose sharply as yields fell.

And then they paid a visit to the commodities markets and took prices down a peg. The dollar, too, they brought down.

In the months ahead, who knows? The two could fall out completely. If that happened, there could be a meltdown in the few things that are going up – commodities, treasuries, oil and even gold. Or there could be a meltup in the things that are going down – stocks and property.

We don’t know. As a financial analyst, this uncertainty worries us a bit. But as a moral philosopher, we take it for granted that there is more under heaven and earth than is contained in our philosophy. We’ll let Mr. Market tell his tale...and happily listen.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.